Recent New Jersey Insurance Decisions

In addition to asserting a claim seeking coverage under its insurance policy, an insured frequently will assert a claim alleging that its insurer acted in bad faith in not paying the claim. This often occurs in cases involving uninsured motorist (“UM”) and underinsured motorist (“UIM”) claims. A UM claim is asserted by an insured against its own insurance company when the insured is involved in an automobile accident with another driver who has no insurance or cannot be located. A UIM claim is asserted by an insured against its insurance company when the other driver is underinsured.

Despite the fact that UM and UIM coverages provide compensation for personal injuries, they are considered to be first-party insurance coverages as opposed to third-party insurance coverages. This is because the insured is seeking recovery under his or her own policy of insurance. A first-party bad faith claim was first recognized by the New Jersey Supreme Court in Pickett v. Lloyd’s, 131 N.J. 457, 621 A.2d 445 (1993). There, the court held:

[A]n insurance company may be liable to a policyholder for bad faith in the context of paying benefits under a policy. The scope of that duty is not to be equated with simple negligence. In the case of denial of benefits, bad faith is established by showing that no debatable reasons existed for denial of the benefits. In the case of processing delay, bad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reasons supported the delay.

131 N.J. at 481. An issue that frequently arises is whether the underlying coverage claim and the bad faith claim should be litigated at the same time.

In Procopio v. Government Employees Insurance Company, 433 N.J. Super. 377, 80 A.3d 749 (App. Div. 2013), which involved a UIM claim, the Appellate Division held that it is an abuse of discretion for a trial court to allow discovery to proceed simultaneously on both an underlying coverage claim and a bad faith claim. In that case, the trial judge bifurcated the claims for purposes of trial, but allowed discovery to proceed simultaneously on both claims. The court ruled that the bad faith claim should have been severed and discovery on that claim stayed until resolution of the underlying UIM claim.

Recently, in Wacker-Ciocco v. Government Employees Insurance Company, 439 N.J. Super. 603, 110 A.3d 962 (App. Div. 2015), the Appellate Division addressed a somewhat related issue. The issue in that case was whether the trial court could deny a motion to sever the bad faith claim and permit discovery to move forward on that claim when the insurer has produced certain bad-faith related documents prior to moving to sever the bad-faith claim and stay discovery. The court held that it could not.

Like Procopio, Wacker-Ciocco arose out of a UIM claim asserted against Government Employees Insurance Company, which is better known as GEICO. There, the insured argued that GEICO acted in bad faith by failing to pay her UIM claim. GEICO produced portions of its claim file during discovery. It then moved to sever and stay the bad faith claim pending resolution of the underlying UIM claim.

The trial judge denied GEICO’s motion, concluding that there was no reason to stay discovery because “the cat [was] out of the bag” given that the insurer already produced certain documents. 110 A.2d at 965. A second judge reaffirmed the prior ruling in connection with a subsequent discovery motion. GEICO subsequently filed a motion with the Appellate Division seeking leave to file an interlocutory appeal. While such motions are sparingly granted, the Appellate Division nonetheless granted the motion and reversed.

The court began its analysis by noting that “[a]s a preliminary matter, the insured who alleges bad faith by the insurer must establish the merits of his or her claim for benefits” under the policy. Id. at 967. “If there is a valid question of coverage, i.e., the claim is ‘fairly debatable,’ the insurer bears no liability for bad faith.” Id. (quoting Pickett, 131 N.J. at 473). “If the insured is unable to establish a right to the coverage claimed, the bad faith claim must be dismissed.” 110 A.2d at 967.

The court went on to note:

Bad faith is an intentional tort. To establish bad faith, a plaintiff must show the lack of a reasonable basis for denying the claim or unreasonably delaying its processing, and the insurer’s knowledge or reckless disregard that it was acting unreasonably. This claim cannot be sustained by evidence of negligence, mistake or delay in payment without some showing of the insurer’s wrongful intent.

Id. at 968. Citing Procopio, the court then noted “that proof an insured is entitled to coverage as a matter of law is a necessary pre-requisite to pursuing discovery regarding a bad faith claim.” Id. at 969. According to the court, “[t]his principle does not become inapplicable simply because some discovery relevant to the bad faith claim was produced here.” The court further noted that while certain documents were produced, GEICO did not produce its entire claim file. “Therefore, the competing interests implicated by ordering simultaneous discovery on both the coverage and bad faith claims remained in play.” Id. Consequently, the court concluded that the trial court erred in allowing bad-faith discovery to move forward simultaneously with discovery on the UIM coverage claim.

Both Wacker-Ciocco and the court’s earlier decision in Procopio involved bad faith claims arising out of the failure by an insurer to pay a UM/UIM claim. It appears, however, that the two decisions have much broader implications and would apply to any first-party bad faith claim. Indeed, the court relied on a number of decisions outside the UM/UIM context.

As a general matter, insurers routinely produce their claim files as part of discovery. In Wacker-Ciocco, GEICO did not do that. Rather, it produced certain select documents from its claim file that it believed supported its coverage denial. It is not clear what would have happened had CEICO produced its entire claim file prior to moving to sever and stay the bad faith claim. Had that happened, an argument could have been made that “the competing interests implicated by ordering simultaneous discovery on both the coverage and bad faith claims” were no longer in play. In order to prevent such an argument, therefore, an insurer should move to sever and stay a bad faith claim at the outset of the litigation before any documents are produced. Otherwise, it runs the risk of having to litigate both claims simultaneously.